Winter 2015

On-Demand Economics Revised

Thesis: Q’s strategy is not setting a new standard, it’s simply using economics.

Katie Brenner wrote an article in Bloomberg View called “Happiness Can Be an On-Demand App,” where she discusses the hiring tactics of on-demand startups such as Uber. Brenner outlines two different approaches based on two gatherings she attended – one at Uber and another at Q (a New York startup that matches workers with companies that need office cleaning). “At the first meeting, last spring, drivers assembled in San Francisco to protest their treatment by Uber. They said the ride-hailing company was exploiting them. Uber staff members struggled to appease the disgruntled contractors, and the conversations were heated and tense.” The second was a gathering at Q, where “workers, called “operators” mingled with company founders, executives, engineers and sales staff at one of Q’s monthly operator assemblies. The conversations were loud at times, punctuated by hellos, hugs and high fives. They had gathered to express their concerns and problems and learn more about the company’s growth. Several operators told me they loved Q as well as the businesses they cleaned, which they referred to as their clients.”

The Uber protest signifies the first hiring tactic – one in which workers are regarded as contractors “who aren’t necessarily eligible for the minimum wage, benefits or compensation for on-the-job injuries and other claims.” This distinction is a key component of Uber’s competitive advantage and crucial for their long-term success. The reason is because Uber saves an incredible amount of money by avoiding insurance costs, administrative costs, and any legal liabilities.

The second tactic is the Q model, in which “operators are full-fledged employees who get benefits, including health care.” Now you might be wondering how this makes Q different than a regular cleaning service. The reason is that Q uses an algorithm to predict cleaning needs and schedules, and then uses an on-demand model to match workers with clients. With that in mind, we can now analyze Q’s hiring tactic from a strategic standpoint. Q has clearly made a calculated decision because as opposed to Uber, they have chosen to incur the associated costs. However, as evidenced by Brenner’s experience, Q has created a collaborative and friendly work environment that makes them preferable to many of their direct competitors.

Where Brenner goes wrong is that she incorrectly makes the assumption that Q is setting the new industry standard for on-demand workers. One of her arguments is that “when labor markets are competitive — which is increasingly the case in the on-demand sector — workers will take company culture into account. To attract the best talent, companies will need to show they value drivers, handymen and housekeepers in the same way as, say, tech workers who write code.”

Brenner’s point is a valid one, but I don’t see this as a huge revelation. I think this trend is simply an application of the Coase Theorem. We can think about this in terms of vertical integration. The difference between the Q tactic and the Uber tactic is that Q decided to vertically integrate by buying its suppliers as opposed to outsourcing. The Coase Theorem suggests that firms vertically integrate when it is less costly to perform an activity/transacting using a firm’s hierarchy rather than contracting with another firm than a market exchange.

In this case, Q believes that the potential cost of using contracted workers is greater than the cost of hiring them. This makes sense because in Q’s line of work, “Operators cross the threshold between public and private space, so there’s a greater need for the company to create a truly consistent experience no matter which operator cleans an office.” What this means to me is that the potential cost of a mishap using temporary workers is greater than the cost of creating the consistent experience by hiring them. Uber, on the other hand, is in a completely different line of work, where the cost of contracting is not as high, which is why they decided not to vertically integrate.

So in response to Ms. Brenner, I don’t necessarily think that Q “becoming the standard-bearer for a new type of on-demand service company,” I just think the strategy they chose was an application of economics.